Can the Invisible Hand of the Market Reduce Pollution in India? Time to Find Out.

A few days ago I attended India’s launch of a pilot cap-and-trade scheme for conventional air pollutants in three states – Gujarat, Maharashtra and Tamil Nadu. An initiative of India’s Ministry of Environment and Forests (MoEF), this is the first step towards a nationwide market-based approach to reducing pollution from industries. At the official launch in New Delhi, the buzzword being repeatedly bandied about by MoEF and India’s Planning Commission was “market-friendly”, since the trading scheme is seen as being less onerous to industry than traditional command-and-control pollution regulations.

In its pilot stage, the scheme will only cover Suspended Particulate Matter (SPM). At a later stage, the trading mechanism could be expanded to include other conventional pollutants. Targeting SPM in the pilot stage is a wise choice, since this is one of India’s most significant pollutants. India has 15-20 million people who suffer from Asthma, and nearly 60,000 deaths a year in India are attributable to Asthma.

The three states where the scheme will be piloted are amongst India’s most populated, most industrialized, with large urban clusters and with a track record of better governance, making them ideal candidates for this pilot scheme. Maharashtra, for instance, is India’s leading industrial state, contributing 13% of the country’s industrial output, and is also the second most urbanized state in India. Gujarat, similarly, is home to 12% of India’s overall manufacturing, and also to India’s fastest growing city, Ahmedabad. Tamil Nadu, India’s most urbanized state, has the fourth largest economy amongst Indian states. 

Some key features of the The Emissions Trading Scheme (ETS) are as follows:

• It is designed to apply not to states as a whole or to individual industrial units (i.e. point sources) but to clusters or regions of industries.
• An overall limit or cap will be identified for each cluster by the relevant regulator, i.e. the State Pollution Control Board (SPCB), to be lowered over time.
• Permits will be allocated to various units within each area, relative to the area’s baseline emissions. The initial allocation is most likely to be free.
• Once allocated, permits can be sold and purchased by individual industrial units to match their emission levels. For instance, if one unit emits less SPM than its permits allow, it can sell some of its permits to another unit whose emissions exceed its permits. This allows the cost of abatement to shift more towards industrial units that can cheaply reduce their emissions, rather than those for whom it is more expensive to reduce emissions (and cheaper to buy permits).  
• The overall cap of the area remains static, and will be lowered over time, so in the aggregate, pollution will be reduced from all areas.

At the launch of the pilot scheme in Delhi, India’s Minister for Environment and Forests Jairam Ramesh stated that this effort is indicative that environmental protection and industrial growth are not at odds. He commented that his Ministry is often charged with being anti-growth and anti-market, and that this effort should ease the doubts of the “market-wallahs” that the MoEF strongly supports robust economic growth in India. He underscored that this trading scheme allows individual industries to determine how and to what extent they will attempt to meet environmental standards, and that this is a proven mechanism to reduce compliance costs.

Officials from the three pilot states – Gujarat, Maharashtra and Tamil Nadu – spoke at the launch as well and highlighted their main concerns regarding the scheme. The main concern was the cost-sharing between the Center and the States for installation and operation of Continuous Emissions Monitoring Systems (CEMS) which are an essential element of the scheme, to measure and report realtime emissions from industry stacks through the year, and to make the data available online for the regulators to see. Other concerns raised at the technical consultation included questions on what principles would be used to set the cap and allocate permits.

At present, only the overall structure of the scheme (designed by J-PAL, MIT’s Abdul Latif Jameel Poverty Action Lab) has been agreed upon, but a host of technical and regulatory details have to be hammered out before the pilot scheme can become operational. As per current timelines, permits will be issued by the third quarter of 2011, and compliance (including start of trading) will begin in January 2012. The pilot scheme is expected to last through mid-2014, after which lessons from the pilot will hopefully be used to expand the scheme to the rest of the country in 2015.

Across the world, there are innumerable examples of effective market-based mechanisms to regulate pollutants, such as the United States’ sulfur dioxide (SO2) and nitrous oxide (NOx) trading scheme to reduce acid rain. India’s own recent experience with market-based regulatory instruments has been positive. For instance, the roll-out of the Perform, Achieve and Trade (PAT) scheme has been smooth, with phase-1 having entered into effect on April 1 this year. Even though the pilot emissions trading scheme launched last month in Gujarat, Maharashtra and Tamil Nadu is new, it can draw on decades of experience other countries have had with market-based mechanisms, and hopefully grow from strength to strength in order to protect public health in India.

India’s annual economic burden from just asthma-related deaths is estimated by the World Health Organization to be Rs. 10,312 crores ($2.3 billion), and the costs would be exponentially higher if one took into account all other respiratory diseases.  In contrast, the cost of the pilot scheme is just Rs. 360 crores ($80 million), far less than the cost to human health. Millions of Indians suffer daily as a result of high SPM pollution levels, and stand to benefit from the success of the recently launched pilot scheme.

The rest of India – and the world – will be watching the progress of the pilot scheme eagerly, in the hope that this effort will allow Indians to enjoy better quality of life, have improved health, and to truly breathe easy.